Stockco Agricapital Pty Ltd v Sugarloaf Nominees Pty Ltd and Others [2019] NSWDC 12 (11 February 2019)

February 14, 2019

DISTRICT COURT
NEW SOUTH WALES

STOCKCO AGRICAPITAL PTY LTD
(Plaintiff)

SUGARLOAF NOMINEES PTY LTD AND ORS
(Defendants)

FILE NO: 2018/280229
HEARING DATE: 29 November 2018
DATE OF ORDERS: 11 February 2019
DATE OF DECISION: 11 February 2019
JURISDICTION: Civil
BEFORE: Scotting DCJ
DECISION: (1) The proceedings between the plaintiff and the first defendant are referred to arbitration.
(2) The proceedings between the plaintiff and each of the second to fifth defendants are stayed pending the resolution of the arbitration between the plaintiff and the first defendant or until further order of the Court.
(3) The plaintiff is to pay the costs of the defendants of the Amended Notice of Motion on the ordinary basis as agreed or assessed, if the defendants can establish an entitlement to recoverable legal costs.
CATCHWORDS: COMMERCIAL ARBITRATION – arbitration agreement – submission to arbitration – construction of submission or reference – stay of proceedings – severance of conciliation requirement – Civil Procedure Act not applicable in circumstances

Judgment

Introduction

The plaintiff sues the first defendant (Sugarloaf) for breach of contract. On or about 12 September 2016 the plaintiff and Sugarloaf entered into a written agreement, referred to as the Master Livestock Agreement (MLA). Pursuant to the MLA the plaintiff provided funds to Sugarloaf for the purchase of cattle to be reared by it and then sold, with the plaintiff to be repaid with interest from the proceeds of sale. It was a term of the MLA that the parties may from time to time enter into supplementary agreements governed by the MLA.
The plaintiff sues the second to fifth defendants on guarantees entered into to guarantee the performance of Sugarloaf in the MLA and supplementary agreements. Mark Andrew Stoney is a director of each of the defendants.
The defendants move on an Amended Notice of Motion filed 16 November 2018 seeking a stay of the proceedings:

(b) until related proceedings in the Supreme Court of Victoria (2017/04662) (the Related Proceedings) are concluded, or

The plaintiffs resist the interlocutory orders sought on the following grounds:

(b) the plaintiff is not a party to the Related Proceedings and they do not cover the same subject matter, and

Facts

The MLA included the standard terms, set out below, that were put forward by the plaintiff at the time of its execution by Sugarloaf.
Clause 16 of the MLA contains an arbitration clause in the following terms:

If any dispute or difference arises between you and us in connection with this Agreement that cannot be first settled between them by reference to conciliation by us then the matter will be referred to an arbitrator to resolve the dispute or difference. The arbitrator shall be a person with experience in the industry and if one cannot be agreed upon within 14 days, each party will choose its own experienced arbitrator and the two arbitrators will choose an umpire. The decision of the two arbitrators and umpire shall be binding on us and you. In all other respects, the provisions of the Civil Procedure Act 2005 (NSW), or any statutory re-enactment thereof shall apply.

Clause 1 of the MLA provided that the term ‘You’ related to Sugarloaf and the term ‘us’ related to the plaintiff.
Clause 19 of the MLA provides:

If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any aspect, that illegality, invalidity or unenforceability will not affect the enforceability of the remaining provisions of this Agreement.

Clause 32 of the MLA provides:

32.1 You irrevocably submit to and accept generally and unconditionally, the non-exclusive jurisdiction of the Courts of New South Wales and the Courts of Appeal from them with respect to any legal action or proceedings which may be brought at any time relating in any way to this Agreement.
32.2 You irrevocably waive any objection you may now or in the future have to the venue of any such action or proceedings and any claim You may now or in the future have that such action or proceedings have been brought in an inconvenient forum.

On 5 April 2018 the plaintiff sent a letter to the defendants terminating the MLA on the basis of alleged breaches by Sugarloaf for failing to deliver stock, make payments on time and parting with possession of stock (the letter of demand). The plaintiff demanded the payment of $468,513.29 on or before 5pm on 9 April 2018, plus interest accruing at 18% per annum if the demand sum was not paid before that deadline. The particulars of the alleged breaches of the MLA were not contained in the letter of demand.
The parties thereafter entered into negotiations to resolve the dispute. In short the defendants sought a further period of time to allow the stock to be sold when it was more mature and thereby worth more at market.
The plaintiff did not take any steps to attempt to invoke clause 16 of the MLA.
On or about 17 November 2017, the Related Proceedings were commenced by Mr Stoney’s brother, Robert John Bigo Stoney claiming an equitable interest in various real property owned by the defendants. The plaintiff was put on notice of the Related Proceedings from about 12 June 2018. Mr Stoney alleges that the sale of the stock in June 2018 was necessary as a result of the issues arising from the Related Proceedings, and accordingly his brother is responsible for some of his losses. Mr Stoney deposed that he expected the Related Proceedings to go to trial in 2019.

Consideration

Choice of forum and the Related Proceedings

It is convenient to deal with these matters first.
Clause 32 of the MLA applies and in my view is enforceable. The parties agreed to submit to the non-exclusive jurisdiction of the Courts of New South Wales and Sugarloaf agreed to give up any right to argue that the proceedings should be held in a more convenient forum. I have not heard any argument to the effect that clause 32 of the MLA is unenforceable.
It is irrelevant that it may be more convenient to have the matter heard in Victoria. Further, I am not satisfied that the Related Proceedings involve common questions of fact or common witnesses.

The Alternative Dispute Resolution Clause

The relevant law

Section 67 Civil Procedure Act 2005 provides the power to the Court, subject the Rules of Court, to stay proceedings permanently or to a specified day.
Section 7 Commercial Arbitration Act 2010 (the Act) provides that an arbitration agreement is an agreement between the parties to submit to arbitration all or certain disputes which may arise between them in respect of a defined relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract and must be in writing.
Section 8(1) of the Act relevantly provides that in an action brought before a court that is the subject of an arbitration agreement, the court must refer a matter to arbitration unless the agreement is null and void, inoperative or incapable of being performed. It was common ground that the time stipulation in section 8(1) is satisfied in this case.
If the requirements of section 8(1) of the Act are established there is no discretion to not refer the matter to arbitration: John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451.
Section 11 of the Act provides that the parties are free to agree on the mechanism to appoint arbitrators and in the absence of such agreement a party may approach the Supreme Court to undertake the appointment. If there is an agreed appointment procedure and a party fails to act as required, the parties or arbitrators are unable to reach agreement on the matters required, or a third party fails to perform an act required, a party may request the Supreme Court to take the necessary measure, unless the appointment procedure provides an alternative method of appointment.
The Act distinguishes between an arbitration agreement under section 7(1) and an agreement on the procedure to appoint an arbitrator contemplated by section 11(2): Broken Hill Council v Unique Urban Built Pty Ltd [2018] NSWSC 825 at [44]
Arbitration clauses are generally to be approached on the basis that the parties have agreed to a ‘special bargain’ as to the resolution of any dispute between them and there should be a strong bias in favour of holding the parties to that special bargain: Huddart Parker Ltd v The Ship Mill Hill [1950] HCA 43; (1950) 81 CLR 502 per Dixon J.
An arbitration agreement will be inoperative if it has no field of operation or is without effect. Whether an arbitration agreement is in this state is to be determined in the context of the provisions of the Act which may make it operative: Broken Hill Council v Unique Urban Built Pty Ltd [2018] NSWSC 825 at [31]. Examples of inoperative arbitration agreements include where the arbitral tribunal declines to proceed with the reference, the right to arbitrate has been waived or where a court has ordered that it cease to have effect: Administration of Norfolk Island v SMEC Australia Pty Ltd [2004] NFSC 1 at [100].
The requirement that the arbitration is ‘incapable of being performed’ involves proof of more than delay or inconvenience and more than some procedural bar or the effect of a time bar. It is required that there exists some obstacle that cannot be overcome by parties who are ready and willing to perform the agreement: Administration of Norfolk Island v SMEC Australia Pty Ltd [2004] NFSC 1 at [100].
To obtain a stay of proceedings on the basis of an alternative dispute resolution clause three conditions must be satisfied. First, the clause must not purport to oust the jurisdiction of the Court. Second, the dispute the subject of the proceedings must be within the scope of the contractual provision. Third, the agreed contractual process must possess such a degree of definition and certainty as to enable it to be meaningfully undertaken and enforced: Morrow v chinadotcom [2001] NSWSC 209 at [7]- [9].
As to whether a provision that is void for uncertainty is severable from a contract is a question of determining the intention of the parties garnered from the instrument as a whole: Whitlock v Brew [1968] HCA 71; (1968) 118 CLR 445. Where the parties in purporting to make a contract leave some independent part incomplete and uncertain, that part cannot be severed if it is of substance and materiality in the whole bargain: Brew v Whitlock (No 2) [1967] 2 VR 803 at 817 and approved in Humphries v The Proprietors “Surfers Palms North” Group Titles Plan 1955 (1994) 179 CLR 579 at 621-2 per McHugh J.

The plaintiff’s submissions

The plaintiff’s submissions can be summarised as follows.
First, the arbitration agreement is inoperative or incapable of being performed because it is conditional on the dispute or difference first being referred to conciliation by the plaintiff. The plaintiff submitted that there was no guidance in the arbitration agreement as to the requirements of the conciliation or who would bear the costs of it and that the reservation of the referral to conciliation by the plaintiff should be construed as giving the plaintiff a discretion to refer the matter to conciliation and/or ultimately to arbitration.
Second, there was no dispute or difference between the parties at the time of the termination of the MLA.
Third, the appointment procedure for arbitrators contained in the arbitration agreement is uncertain. An arbitrator must have experience in ‘the industry’ but that industry is not specified. Failing agreement between the parties as to the appointment of a single arbitrator, an arbitrator appointed by each party is to appoint an umpire, with the decision of the two arbitrators and the umpire to be binding on the parties. The term ‘umpire’ is not one used in the Act and there is uncertainty as to the umpire’s role.
Fourth, the arbitration agreement refers to the provisions of the Civil Procedure Act 2005, which contains no relevant provisions. The plaintiff contends that the reference to the Civil Procedure Act 2005 was intended to exclude any operation of the Act.

Determination

The conciliation requirement in the arbitration agreement is uncertain because it lacks essential terms. Further matters require agreement before the matter can proceed to conciliation, the administrative processes required to select and renumerate a conciliator are not set out and there is no detail of the process provided to enable it to be sufficiently certain: Holloway v Chancery Mead Ltd [2007] EWHC 2495; [2008] 1 All ER (Comm) 653 at [81]. Accordingly, the requirement to submit a dispute or difference to conciliation in clause 16 of the MLA is unenforceable.
This position does not change if the obligation to refer the dispute or difference to conciliation is a discretionary matter for the plaintiff. In any event, I would not interpret the agreement in this way. The intention of the parties is to have recourse to alternate dispute resolution methods to avoid the time and expense involved with litigation. That intention would be entirely defeated if the plaintiff could choose whether or not to have the alternate dispute resolution mechanisms apply to a particular dispute or difference.
The next question is whether the conciliation requirement can be severed from the arbitration agreement. The parties have set out a dispute resolution clause that culminates in arbitration. In other words, the parties have constructed a regime to avoid litigation. The well-known perceived advantages of arbitration are unlikely to have been intended to have been linked to the legal enforceability of the conciliation requirement. If conciliation had taken place and did not result in a resolution of the matter, the parties clearly intended to proceed to arbitration. I am not satisfied that there is an unseverable nexus between the conciliation requirement and the referral to arbitration. For the reasons given, the conciliation requirement is unenforceable and should be severed from the arbitration agreement. The parties have agreed in clause 19 of the MLA that the remainder of the arbitration agreement contained in clause 16 of the MLA should continue to be enforceable.
For these reasons, I would reject the plaintiff’s first submission.
Clause 16 operates on ‘any dispute or difference’ arising between Sugarloaf and the plaintiff ‘in connection with’ the MLA. The phrase ‘in connection with’ is usually interpreted in a broad fashion. I am satisfied that in this context that it extends to whether the plaintiff was entitled to terminate the MLA and demand payment at the time and in the quantum that it did.
In Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 268 at [93] Hammerschlag J approved the following passage from Merkin and Hjalmarsson, Singapore Arbitration Legislation (Informa, 2009) at p22, which I gratefully adopt:

There is much authority on the meaning of “dispute”. The general definition of dispute requires the making of a claim by one party and its rejection by the other. Whether this has occurred in the course of lengthy correspondence and negotiation between the parties is not always immediately obvious. The making of a formal claim with a time limit for response is perhaps the simplest method of requiring the other party to define his position, but even if this approach is not used a failure by the other party to respond to a claim does not necessarily deny the existence of a dispute particularly where there are clear unresolved disagreements following the conclusion of negotiations. A dispute may also be found to arise even though negotiations are still in progress, at least where it is clear that these are being protracted in an attempt to forestall proceedings.

The plaintiff’s second submission is based on the premise that in the correspondence following the letter of demand that Sugarloaf did not deny that it had breached the MLA, but engaged in negotiations to resolve the matter. On my reading of the correspondence, Sugarloaf did not make any express admissions and the letter of demand did not set out sufficient particulars of the alleged breaches of the MLA to allow Sugarloaf to know the potential extent of any admissions it may make by silence. The position is that at the completion of the negotiations, the plaintiff commenced these proceedings against Sugarloaf which are being defended. Sugarloaf submitted in the argument on the notice of motion that the plaintiff failed to seek payment from the stock agent on an earlier sale of stock and that it was responsible for maintaining inventory numbers. These arguments may ultimately bear on whether or not the plaintiff had a right to terminate the MLA when it did.
For these reasons, I would reject the plaintiff’s second submission.
The plaintiff’s third submission calls into question the certainty of the appointment procedure in the arbitration agreement. The plaintiff’s first complaint is that the industry in which the arbitrator is to have experience is not specified. Sugarloaf’s response is that the MLA relates to the livestock industry and that the arbitrator should have experience in that industry. In my view, the proper construction of the MLA as a whole supports that view and it is hard to envisage any alternative industry. However, the resolution of that question has not yet arisen for determination, if it is to be disputed.
The parties have not yet attempted to agree on a single arbitrator with experience in the industry. That option is still clearly open to them. It follows that the appointment procedure is capable of operating at least to the extent that parties could agree on the appointment of a single arbitrator within 14 days of the commencement of the appointment procedure.
If the parties cannot agree on a single arbitrator, then each is required to nominate its own experienced arbitrator, with the two arbitrators to nominate an umpire. The Encyclopaedic Australian Legal Dictionary defines ‘umpire’ as:

In relation to an arbitration, a person who resolves a disagreement between arbitrators. An arbitration agreement may provide that, in the event of a disagreement between the arbitrators (usually two arbitrators, one nominated by each party), the dispute is to be referred to the decision of a third person, termed the ‘umpire’. The role of an umpire was prescribed in earlier domestic commercial arbitration legislation but now has no legislative basis under the domestic model commercial arbitration legislation.

The appointment of the umpire is a matter for the appointed arbitrators. If the arbitrators do not perform a required function then the Supreme Court would have jurisdiction to do so: section 11(4) of the Act.
Section 29 of the Act provides that in arbitral proceedings with more than one arbitrator, any decision of the arbitral tribunal must be made, unless otherwise agreed, by the majority of all its members. The arbitral panel contemplated by the appointment procedure is composed of more than one arbitrator and accordingly I can see no reason why section 29 would not operate.
For these reasons I would reject the plaintiff’s third submission.
Section 19 of the Act provides that the parties to an arbitration agreement are free to agree on the procedure to be followed by an arbitral tribunal in conducting proceedings. Failing such agreement the arbitral tribunal may, subject to the provisions of the Act conduct the arbitration in such manner as it considers appropriate.
I interpolate by its fourth submission that the plaintiff contends that the procedure of the arbitration has been determined by the parties to be that provided for by the Civil Procedure Act 2005. It is apparent from the terms of the Civil Procedure Act 2005 that the procedure for court referred arbitrations set out therein are not suited to application in the present context and it follows that this part of the arbitration agreement would be unenforceable, if that was the intention of the parties.
In Lucky-Goldstar International (HK) Ltd v NG Moo Kee Engineering Ltd [1993] HKCFI 14, the parties agreed that the arbitration would be in accordance with the rules of an association that did not exist. Kaplan J rejected the argument that this nullified the agreement to arbitrate, because it was clear that the parties intended to arbitrate any disputes that may arise and the arbitration was to be conducted according to the law of the place specified to be the seat of the arbitration. Kaplan J decided that the best way to deal with the reference to the non-existent rules was ignore it, because the parties could not have intended to place any importance on a set of non-existent rules. This reasoning was applied by Hammerschlag J in Broken Hill Council v Unique Urban Built Pty Ltd [2018] NSWSC 825 at [53]- [54].
In my view, the parties’ clear intention in clause 16 of the MLA was to arbitrate any difference or dispute arising in connection with the MLA. I am not satisfied that the parties placed any reliance on a set of procedural rules that were obviously incapable of application.
There is nothing in the MLA to support the construction that the reference to the Civil Procedure Act 2005 was intended to oust the operation of the Act.
The plaintiff has accepted, by commencing these proceedings, that the law of New South Wales applies to the dispute and I see no reason why the Act would not operate.
For these reasons I would reject the plaintiff’s fourth submission.
Accordingly, the proceedings between the plaintiff and Sugarloaf should be referred to arbitration.
The guarantees do not contain an arbitration agreement. However, Sugarloaf’s liability for breach of the MLA (if any) to the plaintiff and the quantum of any damages are governed by the arbitration agreement in clause 16 of the MLA. Accordingly, if the litigation on the guarantees is permitted to continue, it is likely to result in the duplication of proceedings as each guarantor would have a defence to the extent of establishing that Sugarloaf was not liable to the plaintiff or liable only to a limited extent. Alternatively, the outcome of the arbitration is likely to simplify the issues in the guarantee proceedings.
In all of the circumstances, it is in the interests of justice to stay the proceedings against the second to fifth defendants pending the outcome of the arbitration between the plaintiff and Sugarloaf.
As to costs the plaintiff has been wholly unsuccessful. Costs would ordinarily follow the event, however, Mr Stoney represented the defendants and is thereby not ordinarily entitled to claim costs unless they are legal costs properly incurred in the proceedings. The appropriate order is that the plaintiff pay the defendant’s costs, subject to those costs being recoverable legal costs.
The orders I make are as follows:

(2) The proceedings between the plaintiff and each of the second to fifth defendants are stayed pending the resolution of the arbitration between the plaintiff and the first defendant or until further order of the Court.

(3) The plaintiff is to pay the costs of the defendants of the Amended Notice of Motion on the ordinary basis as agreed or assessed, if the defendants can establish an entitlement to recoverable legal costs.